Tests of rationality, neutrality and market efficiency. A Monte Carlo analysis of alternative test statistics

Dennis Hoffman, Stuart A. Low, Don E. Schlagenhauf

Research output: Contribution to journalArticle

36 Citations (Scopus)

Abstract

This paper examines the small sample properties of three testing strategies used to analyze the rationality, monetary neutrality and market efficiency hypotheses. We focus on the original 'two-step' Barro test of the MRE hypothesis formed entirely from OLS results, a test that employs the correct variance-covariance formulae for these 'two-step' estimates, and Mishkin's FIMLE testing framework. Each test is examined under likely model respecifications. The findings highlight the extensive bias incurred by drawing inferences from simple unadjusted 'two-step' estimates and reveal the relative power of all tests in identifying alternatives to the null hypotheses.

Original languageEnglish (US)
Pages (from-to)339-363
Number of pages25
JournalJournal of Monetary Economics
Volume14
Issue number3
DOIs
StatePublished - 1984

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Rationality
Monte Carlo analysis
Test statistic
Neutrality
Market efficiency
Testing
Small sample properties
Inference
Monetary neutrality

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Tests of rationality, neutrality and market efficiency. A Monte Carlo analysis of alternative test statistics. / Hoffman, Dennis; Low, Stuart A.; Schlagenhauf, Don E.

In: Journal of Monetary Economics, Vol. 14, No. 3, 1984, p. 339-363.

Research output: Contribution to journalArticle

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